High First Quarter Costs Don't Change the Outlook for First Majestic Silver Corp

Silver miners continue their battle on costs as low silver prices limit their cash flows. This process does not always go smoothly. For example, First Majestic Silver (NYSE: AG  )  recently reported first quarter all-in sustaining costs of $18.71 per silver equivalent ounce, far above its own full-year guidance of $15.87-$16.69 per ounce. However, the company is likely to reduce its costs going forward.

Higher costs are likely a one-time event
High costs may put serious pressure on a silver miner in the current price environment. For example, Coeur d'Alene Mines  (NYSE: CDE  ) shares remain under pressure after the company reported first-quarter all-in sustaining costs of $19.12 per silver equivalent ounce. High costs put Coeur d'Alene Mines into a vulnerable position in the event of further silver price downside.

Importantly, First Majestic Silver's first-quarter cost performance is likely a one-time event. The company stated that it anticipates reaching its full-year cost guidance. First Majestic Silver believes that further increases in silver production and cost reductions at its Del Toro mine in Mexico will help it to reach its target. The company stated that it connected the mine to the Mexican national power grid, which allowed it to turn off five out of seven diesel generators and led to lower electrical costs at the mine.

First Majestic Silver's cost performance will be among the best in the industry if the company manages to perform according to its cost guidance. In comparison, Pan American Silver (NASDAQ: PAAS  ) , which reported first quarter all-in sustaining costs of $15.54 per ounce, reiterated its full-year cost guidance of $17-$18 per ounce of silver. The high end of Pan American Silver's cost guidance is quite close to the current silver price, so the company will push hard to reach the low end of its own guidance.

Focus on free cash flow
In its first quarter report, First Majestic Silver stated that cost reductions and treasury growth were the company's top priorities. First Majestic Silver's cash balance declined from $110 million in the first quarter of 2013 to just $41.5 in the first quarter of this year. However, the company has finished a period of heavy spending on the Del Toro and San Martin mines in Mexico. Thus, First Majestic Silver is in a good position to grow its cash, as its capital spending will be limited.

But first, the company should return to producing free cash flow. First Majestic Silver's operational cash flow did not exceed investment spending in the first quarter despite a significant drop in capital expenditures. First quarter operational cash flow was negatively influenced by a combination of low silver prices and higher costs. The company's second-quarter cash flow has a chance to grow, as its second quarter costs will likely be lower. However, second quarter silver prices have been lower versus the first quarter. If the pricing situation does not improve, the drop in costs will likely be offset by the drop in silver prices.

Bottom line
First Majestic Silver's first quarter cost performance should not scare investors, as costs will likely drop as soon as the second quarter. Meanwhile the company's production growth is remarkable. First Majestic Silver produced 3.63 million silver equivalent ounces in the first quarter of this year, while it produced 2.73 million of silver equivalent ounces in the first quarter of 2013. Importantly, the company managed to get this production growth without accumulating significant debt. All in all, First Majestic Silver is a solid producer with possible upside.

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